My Lords, the regulations aim to address failures of retained EU law to operate effectively, as well as deficiencies arising from the withdrawal of the United Kingdom from the European Union, in the field of accounts, reports and audits of UK corporate bodies.
I turn first to the EU accounting directive. The law in the UK on preparation and filing of accounts and reports by corporate bodies is compliant with the EU’s accounting directive. There is also a directly applicable EU regulation which relates to preparation of accounts in accordance with international accounting standards—the so-called IAS regulation. Both the accounting directive and the IAS regulation apply throughout the EEA. The department will bring separate legislation to the House that will address how we intend to deal with the deficiencies presented by the IAS regulation after the UK’s withdrawal from the EU.
Although the fundamental elements of the current company accounts and reports legislation will remain the same after our exit from the EU, it still needs amendment to ensure that it remains effective and makes provision which is appropriate to reflect the UK’s new status outside the EU.
The accounting directive provides for reciprocal arrangements for company group structures. For example, exemptions from producing consolidated accounts are permitted to businesses if the parent is registered in the EEA and itself produces consolidated accounts which are compliant with EU law. In the absence of a negotiated agreement about the economic relationship between the UK and the EU containing reciprocal arrangements, it is inappropriate to continue with preferential treatment for EEA entities or UK entities with EEA parents.
This instrument will mean that businesses registered in EEA states will be treated in the same way as those registered in other third countries. UK businesses with EEA parents will no longer benefit from the exemption from having to produce consolidated accounts. However, UK businesses with parent entities registered in the UK will not be affected by these changes.
The regulations do not create new criminal offences. However, the amendments will extend the scope of the pre-existing criminal offences. For example, dormant companies with parent entities listed in the EEA will no longer be exempt from preparing and filing accounts with Companies House. Failure to file accounts on time would mean that they would commit an offence and be liable to incur fines if prosecuted, as well as civil penalties. That is consistent with the approach for similar companies with parents outside the EEA.
The accounting directive sets out certain requirements for businesses to report payments to Governments worldwide relating to the extraction of natural resources, by way of logging and mining. Alongside this, it provides a power for the Commission to grant equivalence to third countries for their system of reporting payments to Governments regarding these activities. This instrument transfers this power to the Secretary of State.
Turning to the second of the two SIs, the law in the UK on regulatory oversight of the audit profession is compliant with the EU audit directive and the EU audit regulation. The audit directive sets out the
requirements on the statutory audit of most businesses, as well a framework of standards for auditors’ work and independence. It also sets out the responsibilities of the competent authorities for statutory audit in member states. Meanwhile, the audit regulation sets additional requirements on the statutory audit of those businesses defined as public interest entities. It forms part of retained EU law under the European Union (Withdrawal) Act and will therefore continue to apply to the UK after the UK’s exit from the EU. Our aim is to ensure that the framework for the regulatory oversight of the audit profession in the UK works effectively following our withdrawal from the EU. The statutory instrument under discussion will help to facilitate this.
Under the audit directive, powers are provided to the European Commission to grant equivalence to third countries for their audit regulatory framework and adequacy to third countries’ competent authorities for their framework on audit regulatory co-operation. This instrument transfers these powers to the Secretary of State. Regulations will be made in the months immediately following the UK’s departure to set out a framework for future assessment of equivalence and adequacy by the Financial Reporting Council. In future, equivalence or adequacy decisions will also be granted by regulations. Following the UK’s exit from the EU, EEA states would be treated like other third countries.
This instrument also extends powers granted to the UK’s competent authority, the FRC. Certain powers have previously been granted to the FRC by the Secretary of State but now need to apply more broadly to reflect the UK’s exit. The instrument enables the FRC to enter into mutual recognition agreements to recognise audit qualifications with the EEA states. It also enables the FRC to register EEA auditors as third-country auditors where they audit businesses outside the UK that are listed on UK markets. This instrument transfers the European Commission’s power for the adoption of international auditing standards to the FRC. As the FRC already sets UK standards in line with the international standards, we anticipate no immediate changes.
This instrument provides certain transitional arrangements for the auditors affected and their client businesses. To ensure companies and investors remain confident in UK markets, these will apply until the end of 2020. During this period, we will continue to recognise EEA audit qualifications, firm registrations and approvals, EEA audit regulatory frameworks as equivalent and EEA competent authorities as adequate. These transitional arrangements will mean that there will be no cliff edge for EEA companies that list securities on UK markets. They will also allow the FRC the time to put in place the procedures necessary to assess the equivalence of EEA states, as well as the adequacy of their competent authorities.
The Government have carried out a de minimis impact assessment of these regulations, as the overall costs to business were expected to be small. The assessment confirmed that the impacts on business would be minimal. Only a limited sector will be affected by most of the substantial changes made in the Statutory Auditors and Third Country Auditors Regulations. This is because the amount of cross-border business affected by this instrument is small. The most significant
effects are for UK businesses listed on EEA markets, whose auditors will have to register with the FRC, and for UK businesses that only trade securities in the EEA, as their auditors will be subject to less regulation than before.
The Government have worked closely with businesses and regulatory bodies to ensure the regulations achieve continuity wherever possible while addressing the deficiencies arising from the UK’s withdrawal from the EU. The instruments before us incorporate stakeholder views and insights.
In the unlikely event that the UK leaves the EU without an agreement, the measures contained within these regulations will be critical in ensuring that UK accounting, reporting and audit frameworks continue to provide transparency and certainty to investors. They will also ensure that companies operating in the UK have clear guidelines for preparing and filing their accounts. I commend these regulations to the House.